The MSCI Index is finally including China. It has been announced that MSCI, the US stock index provider, is to include China’s mainland domestic shares in the MSCI Emerging Markets Index. This is the first time that mainland China domestic shares have been included in this index.
The Chinese government is attempting to attract outside capital and open up its financial markets. This is a positive step for them; one that will assist them in meeting their objectives. It will help China open up its financial markets to the West and attract capital from outside Asia.
The MSCI index was formerly compiled by Morgan Stanley Capital International. It is used as a benchmark for global stock funds. However, the MSCI Index includes securities from only 23 countries worldwide. Until now, it has included Hong Kong stocks, but not those of mainland China. This has understandably been bugging China.
The MSCI Emerging Markets Index includes markets that have some of the characteristics of a ‘developed market’ but not them all – and not sufficient to warrant inclusion the index of developed markets. Among the countries in the MSCI Emerging Markets Index are Taiwan and South Korea. This again must have been bugging China, particularly since it has been rejected for the past three years. However, it has now successfully passed the first hurdle to fully developed inclusion in the MSCI Index.
What this means is that the 222 A-shares of the Chinese economy will be included in the MSCI Emerging Markets Index. This MSCI index is one that is being tracked by $1.6 million. The investors involved in that sum will therefore have to invest part of their money in selected Chinese A-shares. Many key investors must have supported China’s application for China to have been included in this MSCI Index.
In the past, China has suffered from inadequate control and regulation of its markets. It has displayed many boom-and-bust elements, with a number of crashes of some high-profile firms. In fact, the Chinese stock market was suspended twice in the first week of January last year. China still has a long way to go to instill confidence in its markets. Government intervention has also been an issue. It is never good when governments interfere in stock market issues.
However, domestic issues aside, China has performed well in its approach to international investment. The MSCI and international investors have been impressed lately with China’s progress. It is hoped that, China being included in the Emerging Nations Index, the country’s stock markets will conform to global norms. This includes improving the transparency of its dealings and not over-riding circuit breakers to suspend trading in stocks.
The Chinese stock exchange has been far too cavalier in the past in how it approached global standards regarding many of its actions. Being included in the MSCI Emerging Markets Index should not only improve regulation of the Chinese stock market, but also enable its equity market to integrate better with those of the developed world. Being included in any MSCI Index should satisfy Beijing – at least for a while.
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